The Price Cut Heard Round the World

Friday, 7 September 2007

No, there’s more to this issue than people not understanding
capitalism. Those of us who’ve already bought an iPhone knew full
well that they’d be hot sellers, and that Apple was making a
killing off of them at $599.

It was never clear to me whether Apple was “making a killing off” iPhones at $599. (More on this in my next post.)

But this price drop shows that Apple was making more of a killing
than anyone could have possibly imagined, more than anyone could
have possibly thought was fair.

I don’t know, I can imagine quite a bit.

I mean, you could probably figure out the raw cost of a pork
belly, but an iPhone is a little harder to pin down. In other
words, everyone assumed that the iPhone was priced more-or-less as
fairly as Apple’s other products and made our valuation decisions
accordingly—and we were wrong.

Here’s where we disagree. A fair price is whatever people are willing to pay in an honest, competitive market, and doesn’t necessarily bear any relation to the cost to produce the good or service. Price collusion between supposed competitors is unfair, but a high price set by one competitor in an honest market is not. When a product is in high demand, it’s natural to charge a high price. A company is under no moral obligation to limit themselves to some sort of maximum “reasonable” profit in the face of consumer demand that would bear a higher price.

I do agree that based on Apple’s recent history, one does not expect a significant price cut just two months after a product is introduced. The downside of early adoption of Apple products is sometimes-sketchy quality control; the upside is that buying early maximizes the time before it’s obsoleted or the price is cut. Except this time. There’s a difference, though, between unexpected and unfair.

But the unexpectedness flowed both ways. Clearly Apple did not anticipate the magnitude of the response — neither from iPhone customers nor (especially) from the news media, which latched onto the story ferociously. News regarding the price cut — and the reaction from angered iPhone customers — far overshadowed coverage of anything else Apple announced on Wednesday.